Average Credit Score for Mortgages Drops from 748 to 727 in a Year

There are signs of easing within the mortgage industry, at least where credit score scores are concerned. According to the latest “Origination Insight Report” by mortgage software company Ellie Mae, the average credit score for a closed mortgage loan dropped to 727 last month, compared to 748 a year earlier. These latest findings were published on January 15, 2014.

Ellie Mae, Inc. is the creator of Encompass, one of the most widely used mortgage-origination software programs in the United States. The software program is hosted by the company, which means they have access to a tremendous amount of data pertaining to mortgage loan origination and closing — including average credit scores.

The company compiles this data in their monthly Origination Insight Report. True to its name, the report provides insight into a variety of loan parameters, including the average FICO credit score for both closed and denied mortgage loans. A closed loan, in this context, is one that reaches the final closing or settlement process (when the actual funding occurs).

The report also shows the average debt-to-income (DTI) and loan-to-value (LTV) ratios for loans processed through the Encompass program. When viewed over time, these data show us whether the mortgage industry is tightening or easing within these specific areas.

Average Credit Score for Mortgage Drops to 727, Going Into 2014

On January 15, 2014, Ellie Mae published their first origination report of the new year. It offers a snapshot of the latest trends within the mortgage industry, as we head into 2014. According to the January report (which contained data through the end of December 2013), the average FICO credit score for a closed loan dropped by more 20 points over the last year or so. Click the image below to enlarge it.

Average FICO credit scores for closed loans, according to Ellie Mae. Click to enlarge.

The table above comes from the latest Ellie Mae origination report. It contains averages for the following loan parameters:

FICO: The average FICO credit score among closed loans.

LTV: The average loan-to-value ratio among closed loans.

DTI: The average debt-to-income ratio among closed loans.

According to this report, the average credit score for mortgage loans is lower today than it was a year ago. In December of 2012, successful borrowers (those who cleared the underwriting process and made it to closing) had an average FICO score of 748. Last month, that average had dropped to 727.

This does not mean borrowers need a credit score of 727 or higher to qualify for a mortgage loan. It just means that the average score among closed loans was 727. The individual averages from one month to the next are not the big story here. What’s more important are the long-term trends, and what they tell us about the lending industry as a whole.

These data suggest there is some degree of easing within the mortgage industry, at least where credit scores are concerned. This should come as good news for borrowers with marginal scores, as they may have an easier time qualifying for a loan in 2014 than in the past.

Why are these averages dropping? According to Nick Timiraos, mortgage and housing writer for The Wall Street Journal, economic stability has something to do with it. “[H]ome prices have stopped falling and the economy is slowly improving, making lenders more comfortable to extend loans,” he wrote last week. He also pointed to the drop in refinancing activity over the last few months, and how this has led lenders to compete more aggressively for purchase loans.

5 Factors That Drive Your FICO Score

There are different types of credit scores. The FICO score is most widely used by mortgage lenders. FICO is an acronym for Fair Issac Corporation, the original name of the company that developed this particular scoring model.

Lenders use these numbers when evaluating you for a loan. Simply put, if your credit score is below average, mortgage financing may be harder to obtain. Conversely, a higher FICO number will make it easier to qualify for a loan. Here’s the good news. You can control some of the key factors that affect your score.

Chart: 5 factors that influence your FICO credit score

The chart above shows the five types of information that influence your FICO credit score. You’ll notice that “payment history” and “amount of debt” play a large role. These are factors you can control. Learn how in this tutorial.

Note: Mortgage lenders consider a wide variety of factors when reviewing loan applicants. The credit score is one of the most important factors, but it’s certainly not the only one. Having a score within the average ranges mentioned above will not automatically qualify you for a home loan. Lenders will also review your employment and income situation, your current debt burden, and the cash reserves you have available. The average mortgage credit scores included in this article were provided by a third-party source that is deemed reliable but not guaranteed.